Insights and Opinions

 

Wednesday, August 18, 2010

Angel and Venture Capital Shareholder Liquidity

from Jeff Cohn





It has been a long 10 year drought of no IPOs and sub par M&A activity that has stifled the startup, venture capital and angel investment community throughout the US.  Finally it appears that the public markets are starting to look for new investment opportunities and are welcoming fresh new companies into the public stock trading world.  Skype, Green Dot (Tech Coast Angels get 110X return), Tesla Motors, Demand Media, Linked In, Zynga, Glam Media, Gilt Groupe and Yelp all have very disruptive business models.  All of these companies have been courted for  M&A opportunities by existing public companies like Google, Microsoft, Yahoo, Apple, Research in Motion, Nokia to be purchased.  However, smart and patient investors realized that they could achieve greater shareholder value by holding out and going public. 

One huge government obstacle that stifled startup investing over the last 10 years was Sarbanes Oxley.  This new financial regulation created a decade of virtually no IPO's and caused thousands of private companies to think twice about going public due to the high costs.  Has Sarbanes Oxley done anything to protect shareholders in public markets?  No, but accounting firms like PWC and Deloitte have sure benefited.  

Another obstacle that prevented many companies from going public was the lack of interest from the large investment banks to take companies public.  This was largely due to distraction and focus as proprietary trading and packaging mortgages like securities (CDOs) became a fad to make lots of money.  Investment banks make most of their money off of commissions and spreads.  When spreads are large the buyer and seller both lose.  It will be interesting to see if companies truly will follow the old school "road show" to do an IPO or if they will take the route that Google did many years ago and have a blind auction.  The blind auction is in the best interest of the company if there is enough investor demand for the IPO as it creates a fair market price for the stock and you get fewer pump and dump investors. 

So what does the renewed interest in IPOs and liquidity for investors mean?  The early stage startup and venture capital industry thrives off of a healthy and short investment cycle which depends on a final outcome (M&A or IPO).  The startup investment cycle can take only a few years during boom times and as long as 10+ years during slow business cycles.  When investors get their money back plus a multiple return on their investment they are incentivized to put this money back to work in new startups.  There are many tax incentives that encourage this but I believe their should be more.  I expect to see the increased IPO activity and liquidity have many long term positive effects on new startups for years to come as the stock market is begging for new currency.  Use the products of these companies and buy some some shares at a minimum (especially Skype).  

Jeff Cohn is the founder of two nationally recognized crowd-sourcing location based mapping services web sites DeadCellZones.com and PhotoEnforced.com. Jeff has spent the last 10 as a VC and angel investor focusing on investment opportunities in Southern California. Jeff has worked for the following VC funds and angel groups San Francisco based MHS Capital, Austin based Hunt Ventures and the Tech Coast Angels. Jeff originally posted this on his blog at blog.estrategypartners.com


blog comments powered by Disqus

Other Articles

Startup Resources